Economics, Technology, Futurism

Menu

George Osborne & Big Banks

The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer.

“If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.”

His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

“That work has been accepted, as far as I’m aware, by all the major political parties. We are now on the verge of getting on with it,” he said.

Several members of the Commission have argued in favour of breaking up large banks, including former Chancellor, Lord Lawson.

This is really disappointing.

Why would Osborne want to see more of something which requires government bailouts to subsist?

Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks.

The 2008 crisis illustrates the problem with a large interconnective banking system. Big banks develop large, diversified and interconnected balance sheets as a sort of shock absorber. Under ordinary circumstances, if a negative shock (say, the failure of a hedge fund) happens, and the losses incurred are shared throughout the system by multiple creditors, then those smaller losses can be more easily absorbed than if the losses were absorbed by a single creditor, who then may be forced to default to other creditors. However, in the case of a very large shock (say, the failure of a megabank like Lehman Brothers or — heaven forbid! — Goldman Sachs) an interconnective network can simply amplify the shock and set the entire system on fire.

As Andrew Haldane wrote in 2009:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampliers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device.

The presence of dense connections imply that large negative shocks propagate to the entire financial system. In contrast, with weak connections, shocks remain confined to where they originate.

What this means (and what Osborne seems to miss) is that large banks are a systemic risk to a dense and interconnective financial system.

Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. The banking system would either have to self-regulate — prevent banks from getting too interconnected, and provide its own (non-taxpayer funded) liquidity insurance in the case of systemic risk — or accept the reality of large-scale liquidationary crashes.

In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.

Post navigation

32 thoughts on “George Osborne & Big Banks”

Many years ago I had a disagreement with a rather self-opinionated relative who took the bailout of Banco Ambrosiano as a sign that the Banking community was now an interconnected net, making it more robust and therefore safer for investors. My question to him was ‘ What if the other banks are also making bad decisions?’ At what point would the system become unstable? He laughed me out of the conversation for being ignorant, (and now has no recollection of the discussion). What exactly are George Osborne’s qualifications to run the economy anyway?

Aziz writes; “Why would Osborne want to see more of something which requires government bailouts to subsist?” Seems like the obvious guess is that these somethings, the megabanks, are a central pillar of The Powers That Be who profit handsomely from the way things currently are, and not incidentally happen to send part of the loot to the Conservative Party of the UK, putting George behind the door of Number 11.

And, BTW, is it just me, or does George Osborne surpass just about every other UK politician in smarmy, child-of-privilege offensiveness? Not very many politicians anywhere are particularly likable, but Osborne seems to out-do even his peers in sheer detestability.

If one chooses to interpret and take the two below texts together and from a strictly legal point of view, then one could actually argue that Israel and Palestine are generating otherwise unwanted communication that is indirectly promoting the cause of Peace.

“We must do more than make peace with [the Palestinians]; we must achieve collaboration and alliance on equal terms.” David ben-Gurion

…If the subjects in question on both sides of the border are not betrayed by suicidal leadership, it is quite possible each of the two camps realise that by working together to reduce violence, each of the leadership groups could not only make more money for themselves but also better promote Peace not just their relevant areas but also across the wider world

Maybe the new Obama team will end up being really good? I cannot help but think it must feel great for all those involved in this (albeit temporary truce) to have played a pragmatic part in helping to ameliorate such a bad problem that really is not going to serve anybody…After all, if you cannot claim to have fixed the economy you can at least claim to be a great diplomat ..

“The British valued virtue more than liberty, the Americans had it the other way around. But where the French differed is that they sought to replace the religion of old Europe with a new cult of reason. They even made Notre Dame Cathedral into a ‘Temple of Reason’. By making a religion out of politics, with the State at its center, the French never embraced liberty the way Anglo-Americans did”

ECB executive wants group to continue spending money on a business that Pearson realised was pointless and not profitable in 2008. Should anybody be surprised? What is the median age of senior central bank employees the world over, I wonder? That would be interesting to know.

Reading what this same ECB exec says about Greece combined with his asking for a clearly non profitable news paper to have more money spent on it really highlights his flawed, and probably arrogant thinking. The guy thinks of himself as a banker who actually operates outside of the market, selling loans to a government, whose continued misbehaviour is obviously producing an inability to repay, like a mortgage dealer working off commission may do with an unemployed crack addict who just walked into a bank asking to buy a McMansion.

“What interests me is the way people talk about math as if it were divinely prophetic. To listen to many of Silver’s defenders, questioning his methodology is akin to rejecting evolution or the laws of thermodynamics, as if only his model is sanctified by the god Reason” … modern science worked, at least in part, towards inventing fish like objects (submarines) that now constantly swim around Earth with nuclear bombs attached to them…this is hardly desirable…in fact, it is arguable insane…is it possible that science can produce just as much stupidity as intelligence!?

The banks need the taxpayers as a safety net, and for their business survival, as the Nationalized industries of yesterday needed the taxpayers cash to survive, so whats new? same principle, different ideoligy!

True. I don’t have a problem with Nationalisation of key industries. Governments (The tax payers) have collective financial clout, larger than any company. The cost of capital is lower, and with the buying power, they can do end to end IT installations, branch builds etc etc on larger economies of scale. What I don’t want to see is “job for life” mentality like you see in most Government run businesses. If they Corporatise a government owned Bank, i.e. have clear financial goals and lending criteria, we’ll see the best financial inter-mediation at lower cost.

Because it is Government owned and transparent auditing and public perusal of operating reports, you’ll have less cronyism and corruption. Australia has 4 Big Banks, none can merge due to the “4 Pillars Policy” of both the major political parties.

But you have 4 CEO, CFO CIO Manager of this, Manager of that, 4 different IT platforms, 4 different ads on TV telling you to “Bank with us”, 4 Audits, 4 financial reports, 4 people to report to the Stock Exchange etc etc. Massive waste.

There is a better way of running this planet, but sadly we just make life more complicated.

I write these ideas to stir the imagination and debate, but with 4 CEO’s lobbying Politicians to keep their multi million dollar jobs, I doubt if I will see it.

cannot argue with what you say, but not all people are selfish, I know many who are honest, and who have integrity, and they are the people we have to put foreward, and look to them for guidance, It’s up to the people to vote accordingly!